FOREX TRADING

• USD: Mixed, equity markets rebound on revived risk appetite, strong US earnings
• JPY: Lower, improving risk sentiment, dovish comments from BOJ Governor Shirakawa
• EUR: Lower, German ZEW business sentiment beats forecast, Weber says Greece may need €80bln in aid
• GBP: Higher, CPI rises more than forecast
• CAD and AUD: AUD & CAD higher, hawkish RBA minutes, BOC to lessen monetary stimulus

Overview

USD traded mixed to lower Tuesday pressured by a rebound in risk appetite as global equity markets trade higher supported by optimism about the global recovery. Optimism about the global recovery was sparked by strong earnings at Goldman and improving investor confidence in Germany. Forecast beating investor sentiment report from Germany and above forecast UK CPI sparked light demand for the EUR and GBP and improving risk sentiment. IMF talks with Greek officials are scheduled to begin Wednesday. EUR gains were limited by statement from the ECB’s Weber that Greece may need €80bln in aid and by selling of the EUR/CAD cross sparked by today’s BOC policy meeting. The BOC signals rates will soon begin to rise in Canada. AUD traded higher supported by hawkish RBA minutes and a 25 bps rate hike in India. The RBA minutes suggest interest rates may need to rise more. The rate hike by India’s central bank may increase pressure on the RBA hike rates. The BOC elects to hold rate policy steady and will begin to lessen monetary stimulus. CAD traded sharply higher as the BOC shifts to a more hawkish policy bias and raises growth estimates. JPY traded lower pressured by improving risk appetite and dovish comments from BOJ governor Shirakawa. No major US economic data was released in today’s trade. The Fed’s Evans says that the US recession is definitely over and risk of a double dip recession very small. Evan’s comments add to optimism about the global recovery. Risk sentiment is the dominant driver of FX trade.

Today’s US data:

No major US economic data was released in today’s trade.

Upcoming US data:

On April 22nd initial jobless claims for week ending 4/17 will be released expected at 460k compared to 484k last month. March PPI and existing home sales will also be released on April 22nd.PPI is expected to rise by 0.3% compared to 0.6% last month. Existing home sales are expected at 521k compared to 502k last month. On April 23rd March durable goods and new home sales will be released. Durable goods are expected to rise by 0.3% compared to 0.9% last month and to rise by 0.8% ex-transports. New home sales are expected at 320k compared to 308k last month.

JPY

JPY traded lower pressured by a recovery in risk appetite as global equity markets trade higher. Today’s rebound in equities is attributed to strong earnings reports from Goldman and IBM and diminishing impact of Friday’s announcement that the SEC has charged Goldman with fraud in regard to subprime loans. Goldman’s first quarter profit doubled that of first quarter 2009. Last week’s charge of fraud by the SEC against Goldman sent global equity markets and commodities sharply lower and contributed to a spike in risk aversion. Goldman plans to launch a vigorous defense against the fraud charges and Financial Times reports that the SEC vote was split down party lines to charge Goldman. The vote split suggests that part of the rationale for the charge could have been motivated by politics and the debate over finance reform. This may make investors less wary of Wall Street as the split vote raises doubt about the timing and credibility of the charge. It may take more than fraud charges and financial regulation to stop Wall Street from making profits. JPY was also pressured by dovish comments from BOJ Governor Shirakawa. Shirakawa said that demand is weak and BOJ will maintain easy monetary policy. Friday a spokesperson for the Japanese ruling party said that monetary easing and currency intervention are needed to weaken the JPY and combat deflation. The only economic data released in Japan today was report that February tertiary index declined by 0.2%. The direction of equity markets and risk appetite are the main drivers for JPY trade.

March trade balance and February all industry activity will be released April 22nd. March trade balance is expected at ¥750bln compared to ¥651bln last month. All industry activity is expected to decline by 0.4% compared to the 3.8% rise last month.

Key technical levels to watch in USD/JPY include support at 91.60 the April 19th low with resistance at 93.53 April 15th high.

EUR

EUR traded lower pressured by Greek debt worries. EUR was initially supported by report of above forecast German investor sentiment. EUR gains were limited by Greek debt worries. German April ZEW economic sentiment improved to 53 from 44.5 last month, a reading 45.1 was expected. The current conditions index came in at -39.2 compared to -51.9 last month. In addition, German producer prices rose by 0.7% in March, a reading of 0.5% rise was expected. The ECB’s Weber says that Greece may need up to €80bln in aid and that he €30 billion aid pledge to Greece may not be enough. Weber’s comments shift focus back to Greek debt worries and limit today’s EUR rally. Greek officials are expected to meet with the IMF Wednesday to discuss possible IMF aid for Greece. Late last week it was reported that Greek officials would seek to tap aid from the EU and IMF. At this writing there has been no announcement of the type of EU/IMF aid for Greece and the Greek German ten year bond spreads widened to a new record high. The rising cost of financing the Greek debt increases the risk of a Greek debt default. EUR remains vulnerable to uncertainties about the Greek debt outlook.

On April 22nd EU manufacturing and services PMI for April be released. The manufacturing PMI is expected to improve to 56.7 from 56.3 and the services index is expected to improve to 54.5 from 53.7. On April 23rd German April IFO business climate survey will be released expected at 98.6 compared to 98.1 last month along with EU February industrial orders expected that -1% compared to -2% last month.

The technical outlook for the EUR is negative as EUR fails to hold above 1.3600. Expect EUR support at 1.3416 the April 19th low with resistance at 1.3667 the April 15th high.

GBP

GBP traded higher supported by report of above forecast UK inflation. UK March inflation rose by 0.6%m/m and 3.4% y/y, a 3.2% annual CPI rise was expected. The BOE’s inflation target is 2%. Today’s CPI rise may increase pressure on the BOE to end its asset purchases and begin to normalize monetary policy as inflation pressures continue to build in the UK. The rise in UK inflation is attributed to higher energy and food costs and the impact of weaker GBP which contributed to higher cost of imports. In addition, core inflation accelerated to 3% from 2.9% and February. UK election uncertainty continues to limit GBP gains. The UK general election will be held on May 6th and the race has tightened with a surge in support for the Liberal Democratic Party. A surge in support for Liberal Democratic Party increases the risk of an election tie and a hung parliament. If the election results in a hung Parliament it would greatly reduce the likelihood that the UK will take action to reduce its budget deficit. Failure by the UK government to reduce its budget deficit could result in a downgrade of the UK AAA sovereign debt rating. UK election uncertainty coupled with improvement in the UK economy clouds the outlook for BOE policy. UK economic data suggest that the UK economy is improving and inflation rising. The improvement in the UK economy may still have impact on our UK election and could work in favor of the current ruling Labor Party. Wednesday the UK will release employment figures and mortgage data. Thursday the UK will release retail sales. Friday the UK will release Q1 GDP. If these reports confirm improvement in the economy the data could boost support for the Labor Party and encourage speculation that the BOE will need to consider a rate hike before year-end. The MPC minutes for the April meeting will be released Wednesday. Investors will look to the minutes for clues to whether BOE officials are shifting focus to inflation risk.

On April 21st February average earnings, April mortgage approvals, March claimant count, February unemployment rate and March money supply will be released. Average earnings are expected to rise by 0.6% compared to 8% last month. Mortgage approvals are expected at 38.4k compared to 35.2k last month. Claimant count is expected unchanged at 4.9% and the unemployment rate is expected at 7.7% compared to 7.8% last month. Money supply is expected to rise by 0.4% compared to 0.2% last month. The minutes for the April 7/8 BOE policy meeting will be released on Wednesday. On April 22nd March retail sales will be released expected to rise by 0.8% compared to 2.1% last month. On April 23rd Q1 GDP will be released expected at 0.5%.

The technical outlook for GBP is mixed as GBP trades will above 1.5300. Expect near-term support at 1.5192 the April 19th low with resistance at 1.5482 the April 16th high.

CAD

CAD traded sharply higher in reaction to today’s BOC policy meeting. The BOC elected to maintain steady rate policy as expected but increased its 2010 GDP growth forecast to 3.7%. According to the BOC policy statement the recovery in Canada is somewhat more rapid than the bank had projected in January. The BOC dropped the conditional language to keep rates on hold until the end of June from its policy statement and said that it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation. The BOC increase of its 2010 forecast and the dropping language from its policy statement that rates will remain on hold through June 2010 conditional on inflation opens the door for a June rate hike. The BOC hint of an earlier rate hike sparked demand for the CAD. CAD was also supported by improving risk appetite as equity markets rally and in reaction to firmer commodity prices as crude trades above $82 a barrel. Investors will be monitoring statements from BOC and government officials about CAD strength to determine the potential risk of intervention to slow the rate of the CAD appreciation.

On April 21st February wholesale sales will be released expected to rise by 3.2% compared to 3% last month. On April 22nd March leading indicators will be released expected at 1% compared 0.8% last month. On April 23rd March CPI will be released expected to rise by 0.9% compared to 0.7% last month along with February retail sales expected to rise by 1.2% compared to 0.7% last month.

The technical outlook for CAD is positive as USD/CAD trades below 1.0100. Look for near-term support at 0.9953 the April 14th low with resistance at 1.0164 the April 20th high.

AUD

AUD traded higher supported by hawkish RBA policy minutes and a rate hike in India. The April RBA policy minutes state that interest rates are still below average and need to rise more. According to the RBA minutes the boom in exports meant that the RBA could not delay further rate hikes. The RBA hiked rates by 25bps to 4.25% earlier this month. The Reserve Bank of India raised interest rates 25bps today to 3.75%. This is the second consecutive monthly rate hike by the RBI and reflects the central bank’s view that the Indian recovery is firmly in place. The strength of the Indian recovery and RBA minutes may increase pressure on the RBA to hike rates at next month’s policy meeting. Additionally today’s BOC policy statement included an upgrade in the BOC’s 2010 forecast for Canada. The upgrade of the BOC’s Canadian growth forecast encourages speculation of an earlier BOC rate hike and optimism about the global recovery. Last Thursday, Australia reported that inflation is expectations rose to the highest level since October 2008. The rise in Australia’s inflation expectations could add pressure on the RBA hiked rates. Australian inflation report and RBA minutes may tip the scales back in favor of another 25bps RBA rate hike next month. AUD frustration remains tied to risk appetite and RBA policy.

This week’s Australian economic calendar includes April 22nd release of March new car sales expected to rise by 3% compared to -1.9% last month. On April 23rd Q1 export and import prices will be released. Export prices are expected to rise by 0.7% compared to a 1.7% decline last quarter and imports prices are expected to fall by 0.6% compared to a 4.3% decline last quarter.

The technical outlook for the AUD is positive as the AUD trades above 9300. Expect AUD support at 9246 the April 19th low with resistance at 9389 the April 12th high.

By Michael J. Malpede

Easy Forex

Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.

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